Trump's fearless rally rages on for third week

A trader wears a hat that reads 'DOW 19,000', which was made by colleague at the NYSE, on the floor of the New York Stock Exchange in New York, New York, USA, on 22 November 2016.(Photo: JUSTIN LANE, EPA)

Investors don't seem to be getting tired of the Donald Trump stock market rally as it rages into its third-straight week.

Stocks blasted higher into new high ground during the week as the reality of Donald Trump being the next president sinks in following the Nov. 8 election. As long as investors stuck with U.S. stocks — and avoided shares of European companies or those in emerging markets as well as government debt — it's been difficult to lose money from the Trump rally. President-elect Trump has vowed to boost U.S. manufacturing by lowering U.S. tax rates and bust global trade agreements, while borrowing more to spend on infrastructure projects.

"Investors are embracing the promise of what may be and ignoring all of the risks. Trumphoria reigns," says Michael Farr, president of money management firm Farr, Miller & Washington. "While lower taxes for corporations and individuals, infrastructure spending and less regulation would be welcome, they are at least a year in the making."

The Dow Jones industrial average Friday notched another high after rising 69 points to 19,152. During the week, the Dow shot up nearly 300 points, pulling it up 800 points since the election. Not only did the Dow ascend through the 19,000 barrier for the first time, the market average has added 4.5% in value since the election and tacked on 1.5% during the week. The broader Standard & Poor's 500 also rose 1.4% this week, and the tech-heavy Nasdaq composite index is starting to join the rally, too, rising 1.5% this week as well.

Investors are getting increasingly confident this market rally has legs, and they appear willing to pay up for a front-row seat. As stock valuations rise, the CBOE Volatility Index, a measure of investors' fear about the market's direction, has dropped by more than a third since the election. Investors feel there could be additional boons to the market from lower taxes, including the expectations U.S. companies will spend hundreds of billions buying their own stock with cash they've been stashing overseas.

Companies that tie into the smokestack and industrial play emphasized by Trump during his campaign are benefiting the most. The best-performing sectors during the week were materials, industrials and energy. The Materials Select Sector SPDR Fund (XLB) rose 2.6% this week and is now up 4.9% since the election. The Industrial Select Sector SPDR Fund (XLI) gained another 2.3% this week and is up 7.7% since the election.

There are some early signs, though, where some of the enthusiasm is wearing off. Financial stocks, which have been the biggest winners since the Trump victory, rose just 1.1% this week. Financial stocks are up 12% since the election as investors applaud rising interest rates and increased inflation, which give banks a chance to boost profit.

But investment themes that don't fit into a Trump administration's plans are paying the price. The best examples are shares of companies in less-developed nations. Shares of emerging markets stocks are down more than 5% since the election and gained a scant 0.6% during the week. Bonds, too, are suffering as investors brace for more inflation and government borrowing. The yield on the 10-year Treasury has risen to 2.36%, as the prices of government debt securities have fallen, making the highest yield in a year. "Higher interest rates, a much higher dollar and strained international trade are immediate headwinds," Farr says.

While stocks are soaring and fear is low, investors need to be cautious, according to a note from Wells Fargo Investment Institute. "Investors should consider remaining well diversified in their global asset allocation, and be prepared for periodic volatility," the note says.